Key Person Insurance provides a financial cushion if a vital team member dies or becomes disabled. It helps businesses recover or transition during a critical personnel loss.
Key Person Insurance
What Is Key Person Insurance?
Key Person Insurance is a life or disability insurance policy purchased by a business on the life of an essential employee — such as a founder, CEO, or top salesperson. If that person dies or becomes disabled, the policy pays the business a lump sum to offset lost income or cover recruiting and transition costs. It’s financial protection for the business against the sudden loss of leadership or revenue-driving talent.
Who Needs Key Person Insurance?
If your company’s success depends heavily on one or two people, their absence could stall operations, delay fundraising, or even threaten your survival. Key Person Insurance provides breathing room and stability during a leadership crisis. It’s also frequently required by lenders or investors during financing rounds.
Common industries that often require Key Person Insurance include:
- Startups or Small businesses dependent on a founder
- Venture-backed companies raising institutional capital
- Sales-driven Organizations with one top performer
- Law Firms, Consultancies, or Professional Services Groups
- Companies with a charismatic public-facing leader
What Does Key Person Insurance Cover?
Key Person Insurance typically covers:
- Death or disability of an essential employee
- Lump sum payout to the business
- Optionally covers loan repayment protection or buy-sell funding
- Covers recruiting or onboarding expenses for a replacement
What Doesn’t Key Person Insurance Cover?
While Key Person Insurance offers broad protection, it doesn’t cover:
- Losses from other causes (e.g., reputational harm)
- Business continuity plans or transition support
- Coverage outside the specific key employee named
How Much Does Key Person Insurance Cost?
The cost of Key Person Insurance varies based on factors like business size, industry, location, and claims history.
Key Cost Factors:
- Age, health, and lifestyle of the insured individual
- Amount of coverage
- Whether it’s life or disability policy
- Occupation and duties
Typical Cost Range:
- $500K policy on a healthy founder: $1,000–$2,500/year
- $1M+ policy with disability rider: $3,000–$8,000/year
- Larger policies or high-risk individuals: $10,000+/year
Risk Management Tips
To minimize potential claims:
- Identify key roles and quantify their business impact
- Pair insurance with a documented succession plan
- Cross-train team members to reduce dependency
- Review policy structure annually as company evolves
Talk to An Expert
Our dedicated experts are ready to provide tailored insurance solutions to clients across a wide range of industries and specialized services.
Schedule a consultation to see how Alliance Risk can reduce your insurance risk.
– We look forward to partnering with you.